THE INDIAN CONTRACT ACT,

1872
Meaning & Definition of Contract
A contract according to Section 2 (4)of the
Indian Contract Act, 1872 is an
agreement enforceable by law and
agreement according to the Act (Section
2-e) is every promise and every set of
promises forming
consideration for each other

THE INDIAN CONTRACT ACT,

1872
Essential requirement of contract based on this
definition can be put as under:
A contract is an agreement which requires
involvement of atleast two parties
An agreement is made of a proposal and
proposal needs acceptance. The person
making proposal is called promisor and the
person to whom promise is made (directed) is
called promisee.
The agreement must be capable of being
enforced by law The stages in information of
the contract are:

THE INDIAN CONTRACT ACT,

1872
i) Offer
ii) Acceptance
iii) Agreement
iv) Contract
Essential Elements of a valid Contract
Every contract is an agreement but every
agreement cannot be a contract under the
law. From enforceability point of view, an
agreement to become
a contract must satisfy the essentials of a
valid contract.

Essential Elements of a valid

Contract

As per Section 10 of the Act, All agreements

are contract if they are made by the free
consent of the parties, competent to contract,
for a lawful consideration and with a lawful
object and not hereby expressly declared to be
void

Essentials of a valid contract are:

1 Mutual assent of the parties
To reach an agreement, there must be a
meeting of minds. This usually consist of an
offer and an acceptance.

Essential Elements of a valid

Contract
An offer is a proposal made by an offerer
(the offerer is the person/party who makes
the proposal) to an offeree (offeree is the
person/ party to whom proposal is
directed) to enter into a legally binding
agreement
For a valid agreement, offer and
acceptance must fulfill underneath criteria

Essentials of an offer and

acceptance
OFFER

ACCEPTANCE

1. Offer must infest a

serious contractual
intent

1. Acceptance, like offer,

must infest a serious
contractual intent
evidenced by a written
acceptance, specific
conduct by offeree, or
payment, including a
deposit. The acceptance
must be communicated to
offerer
2. Acceptance must be
absolute and unqualified

2. Offer must be definite

unambiguous and
certain

Essentials of an offer and

acceptance
OFFER
3. Offer must be distinct
from invitation to offer
(e.g. Price lists,
catalogues,
advertisements display
of goods with price tags
etc are not offer. They
merely state the price at
which goods are held
for sale. They invite
offer to buy but do not
themselves constitute
offer to sell

ACCEPTANCE
3. Acceptance must be
communicated while
offer is valid.

Essentials of an offer and

acceptance
OFFER
4. Offer must be
communicated to
the offeree
5. Offer must be
addressed to the
offeree

ACCEPTANCE
4. Acceptance must be
from the party or
parties to whom offer
is made

5. Acceptance must be
according to the
prescribed mode

Essentials of an offer and

acceptance
6. Offer gets terminated.
a. If acceptance is not
conveyed by offeree
before the lapse of
time of the offer
b. If it is rejected by the
offeree. Subsequent
acceptance of a
previously rejected
offer is not an
acceptance but serves
only as a counter offer

6. Acceptance can be
withdrawn before it
reaches the offerer

Essentials of an offer and

acceptance

c. If the offer revokes it

before its acceptance by
the offeree. Revocation of
offer, however must be
communicated.

d) In the event of death or

insanity of the offerer
before acceptance.
However, death or insanity
of either party after the
contract is formed does
not affect its validity

Essentials of an offer and

acceptance

Important points worth remembering are

Price list is not a quotation (i.e. offer) but an

invitation to offer. Offer is one which can be
revoked.
Repeat orders are not legal. Every transaction
must have offer and acceptance. Rate contracts
are better since offer and acceptance to buy
quantities within the contracted period are
stipulated.

Essential Elements of a valid

Contract
2. Intention to create a legal relationship
Parties to agreement must have serious
intent to create legal relations. An agreement
to go to movie is not an agreement to create
legal relations & therefore is not a contract.
However, an agreement to buy and sell goods
(purchase transaction) are agreement
intended to create some legal relationship
and are, therefore, contract, provided these
agreement satisfy the other essential
elements of the contract.

Essential Elements of a valid

Contract
3. Lawful Consideration
Consideration means anything requested by
the promisor from the promises as an agreed
exchange for his promise. Consideration is
thus the price for the exchange of promise
and it be either
i) money or property, or
ii) a promise to give money or property, or
iii) a forbearance of a legal right

Essential Elements of a valid

Contract

Legal rules to the consideration are

Consideration must be at desire of the
promisor.
Parties to the agreement are free to determine
adequacy of the consideration
Consideration must be certain and not illusory
Consideration must be lawful
Promise of the promisee to pay money for
doing what promisor is already bound to do
does not constitute consideration

Essential Elements of a valid

Contract
Though parties to the consideration are free to
decide consideration, yet agreement must have
some value to be legally binding. For example, if
items are offered as free sample and keys are
found defective, no action can be taken against
its supplier since due to absence of
consideration there is no contract
4. Capacity of the parties
Parties of contract must have legal capacity of
entering into contract. Every person who is
major, who is of sound mind, and is not
disqualified from contracting by any law is
competent to enter into contract

Essential Elements of a valid

Contract
5. Free consent:
Consent means that the parties to an
agreement must agree on the same thing in
the same sense. Consent is said to be free
when t is not obtained by threat, undue
influence, fraud, misrepresentation, or
mistake.
6. Legality of the object
Object of the contract must be lawful. Contract
whose object is not lawful are void. Object of
the contract is said to be lawful if:

Essential Elements of a valid

Contract
it is not forbidden by law;
it would not defeat the provision of
any law
it is not fraudulent,
it is not injurious to the person or
property of another
It is not immoral
It is not opposed to public policy

Essential Elements of a valid

Contract
7. Agreement not expressly declared void
Agreement must not have been declared void by
any law in force the country. Agreements expressly
declared void as per Indian Contact Act, 1872 are:
a. Agreements in restraints of marriage- Section 26
b. Agreements in restraint of trade- section 27
An agreement by which a person is restrained
from
pursuing a lawful business of any kind
is void
except where goodwill not to carry on a
similar

Essential Elements of a valid

Contract
business has been sold within specified limit and
provided the law consider it reasonable
c. Agreements in restraint of legal proceedingsSection 28
d. Agreements, meaning of which is not certain
or capable of being made certain Section- 29
e. Agreements by way of wager Section 30
f. Agreements to do impossible acts- Section 56
g. Agreements contingent upon impossible eventSection 36

Essential Elements of a valid

Contract
8. Compliance with writing, registration and formalities
Agreements can be oral or written. Oral contracts are
equally valid contracts except where writing and/or
registration is compulsory under some statute.
In India, agreements relating to lease, gift, sale and
mortgage of immovable property, negotiable
instruments etc require to be written agreements.
Registration is compulsory for documents of mortgage
deed covering immovable property.
Purchase contracts relating to movable good can be
oral or written. Written contracts are preferred since
terms of oral contract are difficult to prove in the event
of a dispute

Discharge (or Termination) of

Contracts
A valid contract, enforceable by law, results into a
legal liability of parties involved in contract.
Each party has to discharge its liability according
to terms of contract
When the obligations created by the contract come
to an end, contract is said to be discharged or
terminated
A contract terminates (i. e. contract is said to have
been discharged) under following conditions

Discharge (or Termination) of

Contracts
i)

Discharge by performance
If both parties perform their obligations
respectively, the contract comes to an end (i.e. gets
discharged)

ii) Discharge by release

If one of the party to the agreement performs its
obligation while other fails to do so, the party who
has performed its liability is discharged and
automatically gets the right to move against the
party-in-default (defaulter). However if discharged
party (who has discharged its obligation) decides to
excuse the other party (defaulter) from
performance after breach of contract by later, it is
known as discharge of the contract by release

Discharge (or Termination) of

Contracts
iii) Discharge by impossibility of performance
A contract is taken to be discharged if
performance of contract becomes impossible by
a subsequent event. Typical causes of
impossibility of performance are
- Death or incapacitation of promisor in a
contract
for personal services
- Destruction of the subject matter of the
contract
- Change of legislation
- Change in circumstances under which contract
was entered into

Discharge (or Termination) of

Contracts
iv) Discharge by mutual agreement
A contract is taken to be discharged if
both parties mutually agree to terminate
the contact.
v) Discharge by novation
If the parties to the contract agree to
substitute a new contract in place of
existing one or rescind it or alter it, the
original contract need not be performed.

Discharge (or Termination) of

Contracts
vi) Discharge by tender
When one party is ready and willing to
discharge at the right time and place, but the
other party does not accept performance, the
contract is discharged by tender or
attempted performance.
vii) void contract
When a contract is discovered to be void, it s
automatically treated as discharged
viii)Breach of contract
When a party of contact does not fulfill its
obligation and other party moves to the court

Breach of Contract
Breach of contract takes place when either
of the party to the contract
i) Refuse to perform:
Failure to perform is not breach of
contract but refusal to perform is
breach of contract. Failure to perform
(e. g. delay in delivery) is default (i.e.
failure in faithful performance)

Breach of Contract
ii) Prevent other partys performance

Refusal to accept performance from other

party to the contract as well as creating
conditions which makes it difficult for the
other party to perform constitute breach of
contract
For example, in a purchase sale transaction if
the contract call for buyer inspection prior
to dispatch and the buyer does not send his
inspector even after repeated request from
supplier, buys action can be considered as
refusal to accept performance.

Breach of Contract
iii) Makes unilateral amendments:
Amendments in quantities, rate, payment
terms without the consent of the seller may be
considered as breach of contract by the buyer.
iv) Create conditions for non performance:
- non- acceptance of goods from the carrier
- non retirement of documents from bank etc.
- informing supplier modifications in drawings
but
not giving the amended drawings

Breach of Contract
- Not effecting payment where payment terms are
against Proforma invoice and so on.
In the event of breach of contract
Injured party can either terminate part or whole of
contract and claim compensation for loss. To terminate
the contract, the aggrieved party must give a final
notice to the party-in-default, requesting him to make
good the breach within a reasonable time. On expiry of
period, contract may be terminated immediately (i.e.
within reasonable time) If the compensation is not
received within 3 years, a law suit may be filed

Compensation
Compensation is the loss for either breach of
contract or for unfaithful performance
Compensation may be one of the following
forms
a) Specific loss (penalty or liquidated damages)
b) General loss
Specific loss is the compensation specified in
the contract. Specific loss may be either
penalty or liquidated damages

Compensation
Penalty is the punishment afflicted on the partyin-default by the injured party. Since penalty is
the punishment and right to punish rests with
law, the penalty amount is for the law to decide
and it is usually the actual loss incurred by the
injured party
Liquidated damages are intended to liquidate the
loss suffered by the buyer. Since liquidated
damages are pre-fixed in advance and
incorporated into the contract, the buyer has
to just prove that there has been loss.

Compensation
General loss and how it is determined ?
If there is no specific clause in the contract,
general loss is the actual loss incurred which
is direct loss only. Consequential losses are
not provided. For example, in in case of delay
in delivery of supply, labour cost and cost of
idle machinery may be provided and not the
production losses.
While deciding compensation, law also takes
into account steps that should have been
taken to minimise losses and buyer is
expected to provide the proof.